Alaska appears to drop from Arctic pipeline race

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ANCHORAGE, Alaska — Alaska oil and gas producers have shelved the idea of constructing a pipeline between Alaska and the continental U.S.

The demise of the Alaskan project improves the likelihood of a competing pipeline to develop Canada’s Arctic reserves, says Joseph Hanley, Minister of Resources for the Northwest Territories.

If the Alaska decision stands, it would effectively end the two-year battle between the two basins to be the first to bring their gas to market.

ExxonMobil, BP and Phillips Petroleum have concluded that both proposed routes for their Alaska pipeline are too expensive. A decision on the all-Canadian Mackenzie Delta project is expected by the end of the year.

”The determination is that neither (U.S.) route, under current conditions and fiscal structure, are economic,” says Bob Davis, a spokesman for ExxonMobil in Houston.

The companies found costs would be too high whether a pipeline runs north through the Arctic Ocean to the Mackenzie River Delta or south along the Alaska Highway through the Yukon to the continental U.S.

The group estimates it would cost US$15.1-billion for the offshore route and $17.2-billion for the highway route. The result would only be a return on investment of about 10 to 11 per cent, not the 15 per cent producers wanted to see.

Observers say the economics of the all-Canadian Mackenzie Delta project would improve without Alaska by removing commodity price risk and eliminating competition for scarce labor and capital. The Canadian project would cost a quarter of the price and would run down the Mackenzie Valley, linking to the pipeline infrastructure already in place in Alberta.

Feasibility studies to develop the Alaska and Mackenzie Delta basins were launched last year, when natural gas prices were at record highs and the U.S. was concerned about an energy crisis. Since then, natural gas prices have collapsed to about a quarter of last winter’s levels as consumer demand declined, forcing producers to cut spending and reduce activity.

But Wilf Gobert, analyst at Peters & Co., says the same economics that may kill the Alaska project may play into the Mackenzie Delta project. He also cautions the Alaska producers may simply be involved in a power play with the U.S. governments to get more incentives to resume the project.

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